Housing Cool-Down Is 'Orderly,' Fed Chief Says

New homes are for sale near the Seattle suburb of Maple Valley, Wash. New-home construction fell 7.4 percent in April.
New homes are for sale near the Seattle suburb of Maple Valley, Wash. New-home construction fell 7.4 percent in April. (By Ted S. Warren -- Associated Press)
By Tomoeh Murakami Tse
Washington Post Staff Writer
Friday, May 19, 2006

Confirming what home buyers suspected and real estate sales figures have indicated for months, Federal Reserve Chairman Ben S. Bernanke said yesterday that the U.S. housing market was showing clear signs of cooling off.

Bernanke said the slowdown is "moderate" and "orderly" and pointed to the overall strength of the economy.

"We're seeing slowing in sales, slowing in starts. There also seem to be signs that prices are not rising as quickly as they have been for the past few years," Bernanke said in response to questions after a speech in Chicago, Bloomberg News reported.

His comments came as Freddie Mac announced that the average rate on a 30-year, fixed mortgage hit 6.6 percent this week, the highest in almost four years. Rising long-term rates have contributed to the housing industry's slowdown. The Commerce Department this week said construction of new homes fell 7.4 percent in April, to an annualized pace of 1.85 million homes. It was the third straight monthly decline.

Analysts were divided about Bernanke's assessment. Peter Morici, an economist at the University of Maryland's Robert H. Smith School of Business, said Bernanke's comments were "right on."

Morici said he saw the rise in long-term interest rates as healthy, with the economy moving away from its dependence on the housing market and "hyper-consumption" fueled by people taking out loans against their houses. "The housing market is going to come back to earth," he said.

Economist Dean Baker of the Center for Economic Policy and Research expressed concern that rising interest rates were squeezing homeowners who took out interest-only and adjustable-rate mortgages. Even when interest rates were at historically low levels, Baker said, stretched buyers were taking out exotic loans to get into pricey homes.

Baker said a rising inventory of homes in the Washington region could fuel a double-digit price decline if interest rates climb higher. Condo prices could fall by as much as 30 percent, and prices of single-family homes could drop by as much as 15 percent, he said.

Former Fed chairman Alan Greenspan echoed Bernanke's analysis in a speech last night to the Bond Market Association in New York. "The boom is over. We can say that with some confidence," Greenspan said. But, he added, "there is no evidence that prices are going to collapse."

Greenspan predicted that the U.S. market was more likely to follow the path set by housing markets in Australia and Britain, where "prices just flattened out."

The consequences for the broader economy are not yet clear, Greenspan said. But if rising home prices and cheap home equity loans have been fueling consumer spending, as many economists think, "there is going to be some slowing of consumption," he said.

Bernanke did not address whether the Fed would pause in its campaign of raising short-term interest rates. Last week, the central bank raised its benchmark rate for the 16th consecutive time since June 2004 in response to continuing signs of inflationary pressures.

On Wednesday, the Commerce Department reported that April consumer prices rose at the highest rate in three months, leading many analysts to believe that the Fed would continue raising short-term rates. Richmond Fed President Jeffrey M. Lacker said in a speech yesterday in Norfolk that the Fed is less likely to suspend its interest-rate increases in light of higher consumer prices.

The shifting housing market has left sellers and buyers alike uncertain about their next steps.

"On the one hand, you feel like you can sit back and wait. On the other hand, you feel like you don't want to because of the interest rates" said John Booth Babcock, a transportation planner from Arlington who had considered buying but has now decided to wait. "No matter what you think the situation is, there's no comfort level."

Staff writer Brooke A. Masters contributed to this report.

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